Ferguson, BPEA, Draft 1after 9/11. In the five years to July 31, 2007, all but two of world’s equity marketsdelivered double digit returns on an annualized basis. Among the ten best performerswere Egypt (+69 per cent), Turkey (+44 per cent) and Indonesia (+39 per cent). TheUnited States was in fact among the two worst performers (+9.9 per cent). The other wasIsrael’s non-domestic market (9 per cent).
If, as devotees of Samuel Huntingtonbelieved, a “clash of civilizations” between Islam and the West was raging during thisperiod, then Western investors did well to back the other side.The worldwide boom in asset prices was not confined to equity markets.Emerging market bonds also rose strongly, driving down spreads over U.S. Treasuries torecord lows. Real estate markets, especially in the English-speaking world, also sawremarkable capital appreciation. Whether they put their money in commodities, works of art, vintage wine or exotic asset-backed securities, investors made money. When a crisisfinally came in August 2007, it was due not to an escalation of violence in the MiddleEast—that had happened the previous year, with no financial ill-effects—but to humdrumdefaults in the U.S. subprime mortgage market and their knock-on effects on banks andcredit markets. Even the extraordinary quintupling in the price of oil that has occurredbetween September 2001 and the time of writing (February 2008) can be blamed onlypartially on geopolitical factors such as instability in Iraq or the risk of war between theUnited States and Iran. The growth of Asian (and especially Chinese) demand for oil hasbeen significantly more important, as has the depreciation of the currency in which oil ispriced, to say nothing of the limits on global oil refining capacity.A number of commentators remarked on what seemed to be the schizophrenia of the mainstream news media in this period. Readers of the “News” pages of the
New York Times
could be forgiven for thinking that the world was descending into an abyss of strife. Yet readers of the “Business” pages had the impression—until August 2007—thatthey were living, like Voltaire’s Dr Pangloss, in the best of all possible worlds. While thefront section of the paper was a doleful chronicle of death and destruction, the middlesection was a euphoric catalogue of CDOs, IPOs and LBOs.
What Dickens said of theFrench Revolution in
A Tale of Two Cities
seemed also to apply to the six years after
MSCI Barra: http://www.mscibarra.com/products/indices/stdindex/performance.jsp.
I believe I was among the first to remark on this dichotomy, at a conference organized by Morgan Stanleyat Lyford Cay on November 10, 2006.